TARP, Stimulus, Bailouts — Stocks Will Go Up Again When The Guys In Charge Simply Enforce Contract Law

By Cody Willard

You wanna get bullish. I know I do. I mean, the average stock is down more than 1/2 from its highs just a year ago or so. You know that it pays to buy low and sell high…and well, hey, down 50% is by definition pretty darn lower than higher, so what are we waiting for? You lie awake staring at the ceiling, wondering if your investments will get back anywhere near where they were in 2007. Or in 2000. Are you long enough in case the market’s already discounted this economic and earnings downturn?

The problem is that the fundamentals aren’t just bad. They’re bad and they’re getting worse. But even an acceleration of the decline would eventually get priced in, and stocks down 50% would indicate that the markets are seeing past what’s still just been a minor downturn and will eventually get worse. Maybe stocks drop another 20% or so…given that they’re already down 50%, the bulls could argue that it’s 20% downside risk, 100% upside potential…So why aren’t we more bullish right here, right now?

It’s ironic, of course, but the fact is that we’re all losing what little confidence we had in our markets as the government does ever more to try to buy confidence. Since word one of TARP and the Wall Street bailout, I’ve argued that rather than stemming off any major depression that TARP and the other wild policy disruptions that the Republican/Democrat regime in power has panicked the country into is actually driving us toward a depression.

You and I would have more confidence (not to mention more wealth) already today if the government had simply done what it promised you and me it would do — enforce the rule contract law whereby people and companies deal with the consequences of their actions, including those who are rich enough but stupid enough to invest in bad financial stocks or foolish enough to lend fraudulent institutions like Citigroup and Morgan Stanley money for the idiots in those places to lever up and lend to people who wanted to buy real estate at unsupportable bubble levels. Oh, yeah, and those idiots who bought insurance from fraudulent institutions like AIG which probably wasn’t the best place to casually try to protect those foolish investments, as the company never had anywhere near the assets to cover those contracts.

Indeed, the very fact that all these socialist Republicans and Democrats that you vote into office keep telling us that if they can protect the people and companies and organizations that were rich enough but stupid enough to be investors, lenders, borrowers or even trading partners of any of these deceitful companies like BofA, Merrill Lynch and AIG, then all those losses can be “contained”. They never explain to me how the Republican/Democrat methods of spreading the losses across the entire tax base and then actually giving trillions in out and out free cash to the shareholders at the top of these companies is supposed to stop the losses from spreading across the entire tax base.

And that kind of double-thought Catch-22 policy making is what has really got this market on the ropes. It’s why you and I can’t figure out how much risk we can and should take. It’s why the few banks who weren’t stupid and foolish with their assets are panicked and in danger of being nationalized, as they don’t anymore know what is LIBOR, which used to be the rate at which these private banks thought was a reasonably profitable rate at which to lend each other money.

TARP, the new stimulus package (all you hypocritical Republicans who voted against this latest one but voted for TARP or the stupid $160 billion stimulus package from early 2008 or any other pork barrel or targeted tax-trick policies that you always put through too don’t fool us for a minute, btw) and all these policies annihilate the contracts and rule of law that you and I sign every day and instead just ad hoc change the rules of the game…and it’s all being done behind closed doors by the same regulators, politicians, bureaucrats and cronies who have been creating this anarchy for the last twenty, thirty or fifty years.

And that leads us to our final point. It’s the magnitude of both the dollars and the magnitude of the disruption of the rule of law that really has us worried. Trillions of dollars of capital that used to work its way through the system chasing profits will now be chasing politics. In case you were wondering, profits — not politics — make stocks go up.

We will get through this economic downturn. And we will return to a rule of contract law. But we’re gonna have to be very vocal about reinstating those profit-seeking, private property policies. And yes, we’ll have to be patient with the markets as get there. As I noted in my column yesterday, we’re likely to see $250 billion in dividends cut this year. $800 billion in public spending for the most well-connected industries and companies isn’t going to help counter that $250 billion loss of the efficient and multipliable profit-seeking capital.

And really, I hate to say it but this market probably won’t bottom until you and I are both so sick of wondering about the risk of missing the bottom that we don’t write about it on these pages any more. That ain’t today. And that ain’t tomorrow.

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About The Cody Word

Cody Willard writes the Revolution Investing investment newsletter for MarketWatch and posts the trades from his personal account at TradingWithCody.com He is the founder of WallStreetAll-Stars.com and the principal of CL Willard Capital. Cody serves as an adjunct professor at Seton Hall University and is on the University of New Mexico Alumni Board. He was an anchor on the Fox Business Network, where he was the co-host of the long-time #1-rated show on the network, Fox Business Happy Hour. Cody, a former hedge fund manager, and his stock picks and economic outlooks have been featured on NBC’s The Tonight Show with Jay Leno, ABC’s 20/20, CBS Evening News, CNBC’s SquawkBox, Jon Stewart’s The Daily Show, as well as in the Financial Times, Wall Street Journal, New York Times, and many other outlets.